Tuesday, July 27, 2010

Extending the Bush Tax Cuts

Democrats say they want to extend the Bush tax cuts for everyone except families making over $250K/year; Republicans say they want to extend them for everybody. Jonathan Chait thinks that puts Democrats in the political driver seat on tax policy:

“So we're down to a game of chicken. Here's why the Democrats hold the whip hand. They can pass an extension of the middle-class Bush tax cuts through the House. If Republicans let the bill pass, then they've lost their leverage to extend the unpopular Bush upper-income tax cuts. If they filibuster it, then Democrats can blame them for raising taxes on middle-class Americans. It would let Democrats out of their pledge. (Hey, they tried to keep the middle-class tax cuts.) Then nothing would pass, and we'd instantly revert to Clinton-era rates across the board. . . .

“The key factor here is that, just as Republicans got to frame the debate in 2001 by combining the tax cuts into an up or down vote, Democrats can frame the debate now by separating the policies Republicans pretend to care about from the ones they actually care about. Republicans want to have a vote on the whole collection of Bush-era tax cuts. Democrats shouldn't give it to them. You hold a separate vote on the middle class portion and dare them to oppose it.”

According to Chait, once the House extends Bush’s middle-class tax cuts, but lets the tax cuts on the rich expire, Senate Republicans will face a Hobson’s choice. They can either let a Senate version of the House bill pass or filibuster it. If it passes Democrats win because they’ve redeemed one of Obama’s principal campaign promises and advanced their goal of making the tax system more progressive than it’s been since 1980. If Republicans filibuster the bill, Democrats win because they’ll get credit for the solving the short-term-budget-deficit-problem by restoring Clinton-era tax rates and won’t have to take the political blame for not delivering on Obama’s campaign pledge.

Maybe so. But Chait’s analysis strikes me as an example of the kind of wishful thinking that’s becoming ever-more prominent in liberal political strategizing. Consider complications raised by both of Chait’s scenarios.

Take the first scenario under which an extension of the middle-class tax cuts passes but not the extension of tax cuts for the rich. Why should Democrats get more political credit for extending Bush’s middle-class tax cuts than Republicans? If anything, Democratic support for their extension validates the Republican talking points that raising taxes is not only unfair in principle and unwise in a weak economy, but it’s a better way to stimulate a troubled economy than redistributive public spending. That doesn’t sound to me like much of an ideological win for Democrats.

Chait has persuaded himself that it is only by presuming that Republicans care more about the regressivity than the level of tax rates, and that their frustration at seeing taxes become more progressive necessarily redounds to the benefit of Democrats. But what evidence is there for the proposition that Republicans prefer higher, more regressive, tax rates to lower, more progressive tax rates? Not the passage of the Bush tax cuts which made income tax rates both lower and at least arguably more progressive than they were before by lowering the rates across the board and taking a lot of people off the income tax rolls entirely.

Turn now to the second scenario under which Republicans filibuster an extension of middle-class tax cuts leaving us with a restoration of Clinton-era rates. We can be pretty sure that Chait’s static scoring overstates its budgetary attractions (although it’s hard to say by how much) by ignoring the supply-side effects of decreasing the rate of return on capital and the demand-side effects of decreasing middle-class purchasing power. So it’s far from obvious to me that any political credit Democrats get for attacking the deficit will outweigh the costs of presiding over an across-the-board tax increase in the middle of a jobless recovery, especially now that Democrats are unable to counter its growth-inhibiting effects by increasing public spending further or getting the Fed to lower interest rates that are already approaching zero.

Unfair as that may be, the Democrats have probably already baked the macro-economic cake that they’ll have to eat for the rest of Obama’s first term. They can only hope that it tastes better over time.